Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Carpet storage racks.
Topic
Taxability of Persons and Transactions
Date Issued
02-11-1998
February 11, 1998
Dear*****:
This is in reply to your letter in which you seek correction a sales and use tax assessment issued to ***** (the Taxpayer) for the period May 1994 through March 1997.
FACTS
The Taxpayer is a carpet manufacturer. As a result of the department's audit, an assessment was made for certain untaxed purchases used in the Taxpayer's operation. The Taxpayer takes exception to the tax assessed to carpet storage racks. The Taxpayer contends that the carpet storage racks are used to store both work in process and finished goods. The Taxpayer feels that the carpet storage racks used to hold carpet that has to be cut to special order before shipment are being used to hold goods in process and are exempt from tax. The Taxpayer also contests the penalty assessed in the audit.
DETERMINATION
Storage Racks
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in... manufacturing... products for sale or resale. The term "Manufacturing [and] processing' is defined in Code of Virginia Sec. 58.1-602 and "includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site....' (Emphasis added).
Interpreting the above statutes, Title 23 of the Virginia Administrative Code 10-210-920(B)(2)provides:
After final inspection of the finished product, the carpet is moved to the finished goods storage area. At this point the carpet is finished and ready for sale. The carpet is stored in racks located in the finished goods area waiting shipment. When an order for carpet requires a size which is less than a full roll of carpet, the carpet is moved from storage to the cut order/wrapping department and cut to size. The special cut carpet is then rolled and wrapped to protect it during shipment. The remaining roll of carpet is returned to the finished goods area and stored in the racks.
In this case, the storage racks are used to store finished product. Although the carpet may have to be cut to customer specifications, the process is performed on product already manufactured and ready for sale. Accordingly, the function of the racks is a step removed from the production process. As such, the storage racks are not an immediate part of the actual production of the product and do not qualify for the manufacturing exemption.
Penalty
In order for penalty to be waived on third and subsequent audits, sales and use tax compliance ratios must be a minimum of 85%. The Taxpayer's use tax compliance ratio in the current audit is 84%.
Code of Virginia Sec. 58.1-105 grants the Tax Commissioner the discretionary authority to accept offers in compromise of penalty. Based on a review of the audit and the information provided in your letter, I find basis to waive the audit penalty in this instance.
Summary
Based on the foregoing, the audit assessment will be adjusted to remove the penalty applied to the use tax deficiencies as set forth herein. The Taxpayer will receive a revised assessment with interest accrued through the date of this letter. The revised assessment should be paid within 30 days to prevent the accrual of additional interest. Please send your payment to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, please contact ***** of the department's Office of Tax Policy at *****.
Dear*****:
This is in reply to your letter in which you seek correction a sales and use tax assessment issued to ***** (the Taxpayer) for the period May 1994 through March 1997.
FACTS
The Taxpayer is a carpet manufacturer. As a result of the department's audit, an assessment was made for certain untaxed purchases used in the Taxpayer's operation. The Taxpayer takes exception to the tax assessed to carpet storage racks. The Taxpayer contends that the carpet storage racks are used to store both work in process and finished goods. The Taxpayer feels that the carpet storage racks used to hold carpet that has to be cut to special order before shipment are being used to hold goods in process and are exempt from tax. The Taxpayer also contests the penalty assessed in the audit.
DETERMINATION
Storage Racks
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in... manufacturing... products for sale or resale. The term "Manufacturing [and] processing' is defined in Code of Virginia Sec. 58.1-602 and "includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site....' (Emphasis added).
Interpreting the above statutes, Title 23 of the Virginia Administrative Code 10-210-920(B)(2)provides:
-
- Items of tangible personal property which are used directly in manufacturing...are machinery, tools and repair parts therefor, fuel, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items...or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing... (Emphasis added).
- Items of tangible personal property which are used directly in manufacturing...are machinery, tools and repair parts therefor, fuel, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items...or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing... (Emphasis added).
After final inspection of the finished product, the carpet is moved to the finished goods storage area. At this point the carpet is finished and ready for sale. The carpet is stored in racks located in the finished goods area waiting shipment. When an order for carpet requires a size which is less than a full roll of carpet, the carpet is moved from storage to the cut order/wrapping department and cut to size. The special cut carpet is then rolled and wrapped to protect it during shipment. The remaining roll of carpet is returned to the finished goods area and stored in the racks.
In this case, the storage racks are used to store finished product. Although the carpet may have to be cut to customer specifications, the process is performed on product already manufactured and ready for sale. Accordingly, the function of the racks is a step removed from the production process. As such, the storage racks are not an immediate part of the actual production of the product and do not qualify for the manufacturing exemption.
Penalty
In order for penalty to be waived on third and subsequent audits, sales and use tax compliance ratios must be a minimum of 85%. The Taxpayer's use tax compliance ratio in the current audit is 84%.
Code of Virginia Sec. 58.1-105 grants the Tax Commissioner the discretionary authority to accept offers in compromise of penalty. Based on a review of the audit and the information provided in your letter, I find basis to waive the audit penalty in this instance.
Summary
Based on the foregoing, the audit assessment will be adjusted to remove the penalty applied to the use tax deficiencies as set forth herein. The Taxpayer will receive a revised assessment with interest accrued through the date of this letter. The revised assessment should be paid within 30 days to prevent the accrual of additional interest. Please send your payment to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, please contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner